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It's a problem that has baffled financiers for decades: Why don't U.S. investors buy shares in companies overseas? As things stand, Americans hold only 9 percent of equity investments in foreign companies, and yet foreign stocks represent 51 percent of the world market.

Nobody knows why this home bias exists. "It could be lack of familiarity with overseas markets, language and cultural issues, or barriers to international investment--it's unclear," observes James Wardlaw, a managing director at Merrill Lynch.

A new research report released earlier this year could shed some light. "Corporate Governance and the Home Bias," by Lee Pinkowitz and Rohan Williamson, both of Georgetown University, and René Stulz of The Ohio State University, shows that Americans aren't nearly as biased as they seem. In fact, their findings suggest that, au contraire, foreign markets are keeping U.S. investors at bay.

The key to their conclusion is the presence of "controlling shareholders"--investors who own big chunks of a company's shares that they won't sell unless they're paid compensation for their loss of control. These shareholders limit the number of shares available for trading.

While the U.S. equity market accounts for 49 percent of the value of the world market, it makes up almost 60 percent of the world's free-floating shares. "Taking into account the role of controlling shareholders has the effect of reducing (but not eliminating) the home bias of U.S. investors," notes the report.

On average, say the authors, 32 percent of shares worldwide are unavailable for trading. The country-by-country differences are vast. The United States has the lowest fraction of closely held shares--7.9 percent.

Floating Away

Total amount of closely held shares limits U.S. ownership.

Country

% of market cap closely held

% of U.S. investor portfolio

% of world market

Brazil

67.13

0.24

1.12

Canada

48.82

0.54

2.49

China

68.74

0.02

0.91

France

37.98

0.65

2.96

Germany

44.74

0.49

3.62

Hong Kong

42.73

0.21

1.81

Italy

37.54

0.32

1.51

Japan

38.38

1.04

9.72

Netherlands

33.74

0.81

2.05

Switzerland

25.73

0.4

7 2.53

UK

9.93

1.66

8.76

U.S.

7.94

91.29

49.6

Source: Pinkowitz, Stulz, and Williamson

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